COMMENTARY No. 70

THE THREAT FROM TRANSNATIONAL CRIME: AN INTELLIGENCE PERSPECTIVE

In this Commentary Samuel Porteous, a Strategic Analyst with the
Canadian Security Intelligence Service, examines the phenomenon of transnational
crime from an intelligence perspective.

Disclaimer: Publication of an article in the COMMENTARY
series does not imply CSIS authentication of the information nor CSIS
endorsement of the author's views.

Introduction

The scope and power of groups involved in transnational crime (TC) has
unsettled governments around the world. The Chairman's Statement of the 1995 G-7
summit in Halifax stated that transnational criminal organizations represented a
growing threat to the security of the G-7 nations.1 This recognition of one of
the downsides of globalization as a threat both to individual and collective
security is significant. By classifying TC as manifesting a threat to national
security, G-7 leaders recognized that the threat posed by TC in its current
manifestation transcends the sum of individual crimes committed. TC had become
a threat to systemspolitical, economic, environmental and social.

THREATS FROM TRANSNATIONAL CRIME

Threats to Political and Economic/Financial Systems

At the outset of the current discussions on TC, most attention focused on
the illegal drug trade, its attendant violence and easily discernible social
ramifications. There are, however, less dramatic but equally menacing
activities of groups involved in TC that deserve attention. In fact, many
consider TC activities such as major fraud, corruption and manipulation of
political and financial systems more important to those engaged in TC, both from
a point of view of percentage of revenues and future plans, than the illicit
drug trade itself.

A report released by the German Federal Intelligence Service (BND) in the
summer of 1996 concluded economic crime has developed into the "world's
largest criminal growth area".2
This view of the growing importance and sophistication of economic crime was
supported at a recent conference on transnational crime held in the UK. At that
gathering a UK National Criminal Intelligence Service (NCIS) representative made
the point that the majority of Mafia activity is not drugs (40 per cent) but "financial
or business enterprise: investment, banking, financial bidding, fraud". He
noted the same was true of organized crime in Japan. The speaker emphasized the
business and professional skills and extent of contacts with the upper economic
world that enterprise crime has, the strategic enterprises it seeks out for
control, and the numbers of prestigious financial interests implicated in
organized crime.3 At
this same conference, the UK Minister of State for the Home Office, Earl
Ferrers, stated that the biggest threat emanating from TC was that posed to the
economic/commercial and financial systems of several countries.4

The threat to legitimate commercial and financial systems from TC is real.
Fairness and justice in commercial transactions are not abstract concepts.
Criminal interference in economic and commercial decisions through either
intimidation or bribery distorts the market process in a negative way with, as
Transparency International and other rapidly growing anti-corruption groups have
pointed out, real costs to individuals and organizations. The threat to
financial systems is less direct. The threat TC poses to these systems is not "dirty"
money overwhelming "clean" money. The vast majority of financial
transactions are clean. Rather, the fear is these systems, reliant as they are
on their own credibility and reputations, might be tainted by criminal
association and thus lose the credibility so essential to their functions. One
need only examine the flight of capital from the Former Soviet Union (FSU) to
recognize the importance of a trustworthy and secure financial system.

Pierre LaCoste, the former head of the DGSE, France's Foreign Intelligence
Service, has focused on the role TC actors play in major frauds against
government. He has written that the first source of funding for the European
La Cosa Nostra is the manipulation of public funds associated with
regulated markets and major government subsidy programs like those of the
European Union (EU). According to LaCoste, drugs come second as a revenue
source.5 In May of
1996 the European Commission gave credence to Lacoste's statements in reporting
that crime syndicates were behind billions of dollars in major fraud against
European Union (EU) programs such as agricultural and structural subsidies and
various tax evasion schemes.6
In just one case reported late in 1996 the European Commission's anti-fraud
division participated along with German and Italian authorities in cracking a
precious metal-smuggling ring that evaded close to US $100 million in import
taxes. The evasion involved bringing silver into the EU from Switzerland
through "a merry-go-round of phantom or filter companies".7

Canada has not been immune to this type of activity. Cigarette smuggling
rings openly flourished in this country between 1990 and 1994. At its peak
smuggled tobacco supplied 30-35 per cent of the Canadian market. This not only
cost the Canadian treasury hundreds of millions in lost taxation revenue but
established a smuggling infra-structure as easily turned to arms and illegal
alien smuggling as cigarettes and alcohol.8

While all countries are at risk, countries of the former Soviet Bloc have
been particularly vulnerable to these sorts of threats against public and newly
formed private actors. The large-scale privatisation and chaotic economic and
political/regulatory transitions experienced in former Eastern Bloc countries
since the collapse of the FSU have created fertile soil for all manner of
illegal and/or corrupt private sector and public sector activity. According to
transnational crime specialist Louise Shelley, "the most lucrative element
of post-Soviet transnational criminality lies in the area of large-scale fraud
against government."9

From a Canadian perspective crimes of this nature involving resource
products and raw materials are of special importance. Reportedly, many Russian
bureaucrats have aligned or are beginning to align themselves with criminals
involved in the illegal export of raw materials.10 Ronald Noble, an
undersecretary with the US Treasury, has described the scale of income and
excise tax fraud taking place in Russia as unprecedented and a threat to the
stability of the Russian financial system.11
Former director of the CIA, James Woolsey stated in 1994 that according to
Russian Customs officials, "the illegal export of raw materials alone
reportedly costs the Russian government $10 billion in lost revenues per year".12 This is apart from any
destabilizing effect illegally exported Russian natural resources might have on
international commodity markets.

One of Russia's most important export earners, diamonds, is the latest
resource product to trouble the beleaguered central government. In November of
1996, citing mismanagement and other concerns the Russian government gave the
President of the Republic of Yakutiahome of Russia's state-owned diamond
company, which controls 98 per cent of the country's diamond productionone
week to remove officials now running the organization. At this time Alexander
Livshits, Russia's finance minister, revealed the company was facing fines
amounting to more than US $379 million just for its violations of foreign
exchange regulations.13

Concerns regarding behaviour of this nature are so strong the Russian
government recently formed the second "Vecheka", or
extraordinary committee, in its history to assist in and monitor the collection
of government revenue. While the extremely complicated Russian taxation system
evokes little sympathy, influential observers, including the International
Monetary Fund, agree some action was necessary to ensure Russia continues to
raise enough revenue to continue functioning as a state. The formation of this
second Vecheka indicates the Russians are taking this matter very
seriously. The first extraordinary committee's mandate was to deal with
counter-revolutionaries and ultimately evolved into the KGB.14

Countries formerly within the Soviet orbit have been similarly affected.
Groups involved in TC are exerting a disturbing influence over the transition
from state control to market economy. Often this influence manifests itself in
the form of "trusted advisers" to senior political officials who pose
as successful businessmen but are merely criminals. When these TC actors fail
to obtain the results they wish through cooption and corruption they turn to
violence. For example, the attempt on the life of Ukrainian Prime Minister
Pavel Lazarenko in the summer of 1996 was attributed by some to the Ukrainian "coal
generals" whose illegal profits from the Ukraine's coal industry were
threatened by the prime minister's efforts to restore law and order in this
sector.15

The targets and negative repercussions of the various FSU-based TC groups
extend beyond the FSU and its former satellites. Their victims encompass the
globe. Russian TC group activity in public sector fraud affecting other
countries includes large-scale health-care fraud in California, gasoline tax
evasion schemes in California, New York, New Jersey and Ontario (amounting to
billions of dollars) and exploitation of the subsidies the German state provided
resident Soviet Military troops in Germany.16

While the scope, scale and the political/security ramifications of the
Russian activity merit special attention TC is clearly not a strictly Russian
phenomenon. Transnational aspirations have also been detected among African and
Asian-based transnational crime groups. These groups have been particularly
active in financial fraud and other economic crime. In fact, elevated concern
over TC has occurred partially as a result of the increasing strength and
ambitions of these newer more aggressive TC groups. Since they are only now
passing through the violent and politically uncomfortable stages of development
most Western TC groups passed through decades ago.

By beginning to go after the wealth to be found in the Western democracies,
these TC groups are disturbing previously accepted resource allocations.
Through their unacceptable business practices, they are also interfering with
the ability of legitimate developed-country commercial interests to safely and
securely access new opportunities evolving in developing regions. The
privatisation processes now going on in many of the countries most threatened by
TC have drawn the interest of criminals within and outside those nations. These
programs offer a once-in-a-life-time opportunity both to launder criminal funds
and to gain enormous influence in the legitimate economy. Not surprisingly, TC
actors are reluctant to share these opportunities with legitimate investors.

Threat Posed by Transnational Crime

As practised today, TC and related activities:

undermine civil society, political systems and the sovereignty of states by
normalizing violence and graft and introducing a corruptive cancer into
political structures;

dangerously distort market mechanisms, including some government regulatory
activity, depriving consumers and producers of the benefits of fair, free, safe
and secure economic and commercial systems. In extreme cases whole legitimate
economic sectors are dislocated by commerce based on illegal activities,
subverting loyalties from the nation-state and habituating individuals to
operating outside the legal framework;

degrade environmental systems through evasion of environmental safeguards
and regulations;

destabilize strategically important nations and hinder the progress of
so-called economies in transition and developing economies and otherwise
interfere with a nation's foreign policy goals and the international system;

burden societies with the enormous social and economic costs of illegal
drugs.

Cooption and Corruption

Perhaps, even more insidious and threatening than the actual crimes
themselves, is the groundwork that must be laid by TC actors to ensure their
success. To facilitate their activities those engaged in TC must by necessity
target decision centres within countries in order to ease their existence.
Corruption, cooption and political manipulation become primary tools. The goal
is, if not to replace, at least develop a symbiotic relationship with the
centres of power within a country. An atmosphere wherein it becomes
increasingly difficult to disentangle the interests of TC actors from those of
power brokers within the state is the goal.

Again, Russia and Eastern Europe serve as cautionary examples. The moral
vacuum created by the collapse of the Soviet state and the Warsaw Pact,
ineffectual enforcement and regulatory structures, coupled with a still crude
understanding of capitalism and democracyparticularly in the former Soviet
Republicshave resulted in what some describe as a golden age of corruption
within the FSU and Eastern Europe. Emilio Viano of the American University in
Washington DC, has cited estimates that 30 to 50 per cent of Russian TC group
revenues go to corrupt officials.17

Once again the threat presented by this activity is not limited to Russia
and Eastern Europe. The corruptive skills these groups have developed within
the FSU are now eagerly transferred to the penetration of new markets for major
frauds against governments and commercial crimes in countries outside the FSU.
Eric Seidel, deputy attorney general in charge of the New York State Organized
Crime Task Force since 1995:

We do see contacts between the traditional La
Cosa Nostra and Russian criminal groups, primarily in the oil and gas tax scams
where four out of five families, the La Casa Nostra families in the New York
area were profiting from these illegal activities engaged in by the Russian
groups.18

Recent reports of some Russian crime groups' methodical approach to
infiltrating foreign economies and political structures, including the funding
of political parties, support expressed concerns regarding the impact of
large-scale TC on the very fabric of civil society.19 These views are
supported by the head of a unit established by Canada's Immigration Department
responsible for barring entry to Canada individuals believed to be involved in
TC. The official described these Russian TC actors with their enormous
financial resources and corruptive techniques as "a major, major concern"
and "a challenge to our democracy and political institutions."20

The sophisticated techniques employed by the Russian mafia pose serious
enough threats when applied to traditional criminal fields but become even more
worrisome when applied to less publicized TC activities such as certain types of
financial fraud, the disposal of toxic waste or other special materials. In a
recent Canadian example, US $350 million worth of non-radioactive isotopes of
Russian origin were illegally shipped into Michigan from Canada. The materials
were allegedly purchased for US $24 million by a Swedish-Russian joint venture
which transferred ownership of the material through several companies located in
the Toronto area. Canadian involvement in the case was initiated by a request
from the Russian government.21

These corruptive practices should not, however, be seen as unique to Russian
TC activity, but merely standard criminal group activity that should be
anticipated from any TC group of sufficient size and maturity pursuing certain
goals within a jurisdiction. Academic Peter Lupsha described a typical example
of criminal corruption and cooption which took place in a small community that
became a major international drug export consolidation centre in Peru between
1993 and 1994. Eighteen months before the drug operations began, criminal
figures from Colombia and Peru entered the community holding themselves out as
entrepreneurs and tourism developers.

They enlisted local labour and revitalized the
local airport that had been closed for lack of government repairs. They also
brought in satellite television, and provided monies to repair local roads,
docking facilities, the school and medical clinic. They also supplied
supplemental income payments to teachers and government employees, as well as
making direct cash payments to police, politicians and other notables. Only
after being in the community for close to a year, did they reveal their true
identity and purposes. They then asked for and received a public community vote
of support to use the town as a major drug collection and transhipment site.22

During the four months the site was operational, allegedly 40 tons of
cocaine base was moved through the community. In examining such examples Lupsha
is correct in concluding that once criminal groups become embedded within a
society, "organized crime ceases to be a criminal justice problem and
becomes a public policy problem".

At its worst this type of cooption and corruption infiltrates the governing
mechanism of the country itself, raising the unwholesome prospect of "criminal
states". In a criminal state the battle has been lost and TC actors see
the government of the day as a partner, not an enemy.

Terrorist Racketeering and Collaboration with Insurgents

Another area where TC activity raises concern is terrorist racketeering and
collaboration with insurgents. TC actors' vested interest in weak states where
governments are unable to focus firmly and resolutely on TC issues sometimes
leads them to go beyond mere manipulation and corruption of existing political
and governmental machinery to direct support and collaboration with insurgents.
According to Woolsey:

In Latin America powerful drug groups have
established ad hoc, mutually beneficial arrangements with insurgent or terrorist
groups such as the Sendero Luminoso in Peru and the Revolutionary Armed Forces
of Colombia, or FARC. While the relationship between drug dealers and these
groups has been contentious at times, insurgents are sometimes paid to provide
security services for drug traffickers, they often 'tax' drug operations in
areas they control, and, in some instances, they are directly involved in
narcotics cultivation.23

FARC's extensive criminal fund raising activities, particularly through
involvement in illicit drugs, have led many to refer to the one-time hardline
communist group as the 'third cartel'. The importance of criminal activity as a
revenue source to FARC was demonstrated earlier this year when Rudolf Hommes, a
former Colombian finance minister, cited a study on guerrilla finances which
calculated that the main Colombian groups "doubled their funding between
1991 and 1994, with the drug business contributing 34 per cent of income,
extortion and robbery 26 per cent and kidnaps 23 per cent."24

This "terrorist racketeering" has become increasingly common as it
becomes more difficult to obtain funding from state sponsors given the New World
Order in which the Soviet Union is no more and legislation designed to punish
terrorist funding becomes more widespread. The Provisional Irish Republican
Army (PIRA), for example, has reportedly been involved in gaming, social clubs,
fraud and charities in order to raise money.25

Importantly, these terrorist racketeering activities often extend beyond the
direct theatre of conflict. In Canada, according to news reports, the
Liberation Tigers of Tamil Eelam are involved in numerous TC activities,
including partnerships with Pakistani heroin producers/traffickers, alien
smuggling, extortion from Tamil families living abroad, and various forms of
fraud.26 All this in
order to raise funds for their insurgent activities in Sri Lanka.

As traditional funding sources dry up these groups will become ever more
entangled in TC activities.

A STRATEGIC RESPONSE TO TC THREATS

Given the nature and breadth of the threat, governments, in order to go
about their business in the best interests of their citizens, need intelligence
on TC actors. Strategic intelligence consisting of information on who these
actors are, their intentions, capacities and potential impact is essential to
any government response to this problem.

A State's TC Strategic Intelligence Needs

A good example of this strategic intelligence on TC issues came from an
April 1996 hearing of the US House International Relations Committee on the
threat from Russian organized crime. In testimony before this committee, John
Deutch, the director of the Central Intelligence Agency (CIA), provided some
much-needed dispassionate analysis of the big picture surrounding the TC threat.
In describing the CIA's role with regard to TC in the Russian context, he said
the agency was analyzing how the Russian government "will deal with this
problem as it tries to move towards democracy and a free economy and, secondly,
what kind of threat does it convey to us abroad." When asked by a
committee member whether Russia could be described as a "crime state"
where it was "hard to distinguish between the criminals and government
officials", Deutch responded, "I certainly wouldn't call it a crime
state, sir."27 He
went on to say that while he considered the Russian TC issue extremely serious:

if you said to me is it my professional
judgement that this is leading to a government completely controlled by
criminals, my answer to that is no, and if you say is it leading to imminent
collapse of the Russian government to govern the country, I would also say no.28

Deutch also offered some sectoral analysis down-playing the frequently
exaggerated estimates of the number of Russian mafia-controlled banks. During
testimony the director was confronted with the often used figure of 50 to 80 per
cent of all Russian banks being controlled by Russian organized crime and asked
whether he agreed with this analysis. Deutch replied:

We keep very close track of reports on
infiltration by criminal groups in the Russian banking system, as do
international banking organizations and the government itself. I think the
number 50 per cent is tremendously much too large an estimate. But there are
some financial institutions over there which do have these connections.29

Deutch then offered to provide more details in closed testimony.

The environmental impact of some TC activity is another area that lends
itself to strategic analysis. The waste disposal industry has long been known
to be a significant revenue source to the La Cosa Nostra. Waste
disposal becomes critically important when it involves toxic materials. Reports
from Italy indicate the disappearances of up to 30 ships loaded with toxic
waste, in many cases Italian industrial radioactive material, were linked to a
complicated Mafia insurance fraud scheme dating back to the late 1980s. After
being at sea for months these ships were suddenly posted as lost and presumably
scuttled. The Italian government has requested assistance in the ongoing
investigation from the European Commission and Greenpeace.30

In another example, the Russian mafia has taken advantage of the ban on
production of ozone-threatening CFC chemicals in several developed countries by
illegally supplying these markets with CFCs produced in Russia. Reportedly, at
one point, the black market for CFCs in the US was valued at US $600 million.
Interestingly, once the combined efforts of the CIA, US Customs and the Internal
Revenue Service managed to shut down the Russian supply of CFCs the Russian TC
activity in this area began targeting several Western European countries as
possible markets.31

The easy profits to be had by TC groups involved in waste disposal willing
to ignore environmental regulations renders this sector a key target for TC
groups around the world. Few activities better illustrate the threat TC groups
pose than their irresponsible behaviour in this area.

Strategic Intelligence and TC: A Canadian Perspective

The need for this type of strategic analysis on TC issues in a Canadian
context was recognized by the Canadian Security Intelligence Service (CSIS) in
its 1995 Public Report and Program
Outlook. Noting that other governments "are using their security and
intelligence services to fight transnational crime" CSIS stated that the
Service had a role to playprimarily through the provision of strategic
analysisin assisting government deal with the TC issue. The report went
on to say CSIS's established relationships with foreign intelligence services
examining TC issues would play a key role in the Service's work in this area.32

TC-related strategic intelligence could examine a range of issues important
to the Canadian government. For example, a CSIS TC-related strategic
intelligence report might explore the influence of TC figures within a selected
country, what threats this influence presents to Canadian interests and
prognostications for the future. The report ideally would serve as a valuable
aid to decision-making involving Canadian interests and policies to be pursued
with regard to the subject country.

In a similar vein, the Service may be required from time to time to examine
the bona fides of certain large commercial entities operating out of the
so-called "zones of chaos" in the FSU, Eastern Europe or parts of Asia
seeking to do business in Canada. "Due-diligence" work of this nature
resulting in individual and company profiles would be useful to government
economic policy-makers and those involved in counselling Canadian commercial
interests. According to Woolsey, one of the reasons the CIA devotes so much
time to these issues is that "people are sort of storming the battlements
out at Langley trying to get as much information as they can about precisely
this type of subject".33
Finally, intelligence assessments of attempts by TC actors to infiltrate and
influence both foreign governments and our own would be of essential interest to
the Canadian government.

Conclusion

The scope and scale of the threat posed by TC and recognized by the G-7 is
sobering. Its ramifications extend beyond the violence prone drug trade and its
attendant social costs. As serious as these problems are, they should not lead
policy makers to ignore the less familiar and more difficult to discern faces of
transnational crime emerging from the darker corners of the New World Order.
Economic and commercial crimes, including major fraud against governments, will
continue to grow as a percentage of revenue for those involved in transnational
crime. The need to corrupt and coopt civil authorities will expand hand-in-hand
with the ambitions of the various TC groups. As always, power and money will be
the incentives, while the stability of strategically important states, the
maintenance of civil society and the integrity of economic and even
environmental systems will suffer the consequences. Strategic intelligence
provided to policy makers regarding who these TC actors are, their intentions,
capacities and potential impact on Canadian interests will be an essential
element of any approach to this challenge.

Endnotes:

1 Robert Chote, "Leaders zero in on crime and nuclear
safety" Financial Times, 19 June 1995, where it was reported G-7
leaders and Russia agreed to "set up a special task force to find ways of
tackling international crime more effectively having earlier set up a similar
group on terrorism".[Return]

6 See Stephen Bates, "'Mafia gangs involved' in 1 billion
pound EU frauds", The Guardian, London, 9 May 1996. The European
Commission report stated "The need is for tougher enforcement measures
against major crime and for equivalent penalties in all member states for
serious fraud against the community budget: the scale and complexity of the
problem demand an immediate response that will have the maximum deterrent
effect."[Return]

12 R. James Woolsey, "Global Organized Crime: Threats to
U.S. and International Security", Speech given at the Centre for Strategic
and International Studies, Washington D.C., September 26, 1994, p.14.[Return]

16 Louise I Shelley, "Transnational Organized Crime: An
Imminent Threat to the Nation-State?", Journal of International Affairs,
Winter 1995, 48, no. 2. p.485. See also the testimony of FBI Director Louis
Freeh before the House International Relations Committee, 30 April 1996. For
the specific issue of medical insurance fraud as a "billion dollar business"
see the prepared statement of Detective Bill Pollard before the Senate
Governmental Affairs Committee Permanent Investigations Subcommittee, 15 May
1996. Copyright 1996 Federal Information Systems Corporation Federal News
Service. For the Canadian side of the fuel tax scam see Antonio Nicaso, Lee
Lamonthe, "Global Mafia, The New World Order of Organized Crime",
Macmillan Canada, Toronto, 1995, p.43; and Estanislao Oziewicz, "Russian
crime invades Canada, activities range from killing to fuel-tax fraud",
Globe and Mail, Toronto, 6 May 1995, p.A1.[Return]

17 Emilio Viano, "The Russian Mafia and its Impact on the
Privatisation of Markets", The American University, Washington DC,
20016-8043 USA, p.12.[Return]

18 Hearing of the House International Relations Committee,
April 30, 1996, "Threat from Russian Organized Crime", Washington DC[Return]

32 Canadian Security Intelligence Service, 1995 Public
Report and Program Outlook, p.10.
[Return]

33 "House International Security, International
Organizations and Human Rights Subcommittee", 27 June 1994, p.20 Washington
DC. In response to the question, "To what extent do you have information
that you think would be important to our banking regulators, and especially for
our Department of Commerce and Export Agencies like OPIC and the Ex-Im Bank, to
have available to them? Is this something you can do or provide? Where do we
send our constituents for advice, in short?" Woolsey replied, "Yes,
Congressman, Bereuter. This is an area of substantial interest to us. It is a
very important subject, because it has a great deal to do with the ability of
Western interests to establish joint ventures or to invest in or trade with
firms or organizations in Russia. We've been rather vigorous in our recent
efforts to understand this question." Furthermore at p.21 Tony Williams,
Deputy Chief of the CIA Russian Affairs Division, of the Office of Slavic and
Eurasian Analysis: "there is an interagency group focused on Russian
organized crime at which all of the appropriate government departments,
including Commerce, Treasury, et cetera, have representatives. We brief that
group regularly, and they are recipients of our intelligence reports as wewhich
is appropriate for each of them. We have also provided specific briefings to the
various economic elements of the U.S. government, and specifically the
Department of Commerce, for example in response to questions along these lines."[Return]

The views expressed herein are those of the author, who may be contacted by
writing to :